Research

Quick Take: Why Diversity and Inclusion Matter

Aug 01, 2018

The following data and findings are selected from a vast body of research on the benefits of diversity1 and inclusion2 in the workplace, with an emphasis on studies published in the last few years. This list is not exhaustive. For a selection of earlier research on this topic, see: Catalyst, Why Diversity Matters (July 23, 2013).

TALENT

Diverse Organizations Are More Successful at Retaining Talent3

Companies with higher levels of gender diversity and with HR policies and practices that focus on gender diversity are linked to lower levels of employee turnover.4

An inclusive environment is especially important for employees of color, who are most likely to consider leaving their organizations if they perceive pay as inequitable and an unfavorable diversity climate.5

Inclusive Workplaces Maximize Talent and Productivity6

Organizations with strong “diversity climates” (i.e., inclusive work cultures characterized by openness toward others and appreciation of individual differences) are likely to have teams with increased job satisfaction and knowledge sharing.7

  • Strong diversity climates are also linked to reduced instances of interpersonal aggression8 and discrimination.9
  • In 2016, nearly two-thirds (65%) of employees felt that the respectful treatment of all employees was a very important factor in their job satisfaction.10

Moving toward equal levels of gender representation across job levels may reduce occurrences of workplace harassment.11

Employees report experiencing trust and increased engagement at work when they both feel included and perceive that their employer supports diversity practices, such as recruiting diverse job candidates.12

INNOVATION AND GROUP PERFORMANCE

Diverse Teams Are Critical for Innovation13

Teams are as much as 158% more likely to understand target consumers when they have at least one member who represents their target’s gender, race, age, sexual orientation, or culture.14

  • When a workforce reflects the racial/ethnic diversity of its consumer base, employee productivity increases.15

Diverse management teams are innovative and earn a premium for their innovation. According to one recent study, companies with higher diversity in management earned 38% more of their revenues, on average, from innovative products and services in the last three years than companies with lower diversity.16

  • Diversity in gender, country of origin, career path, and industry background are all highly linked to innovation among managers.17
Diversity Reduces Groupthink and Enhances Decision-Making18

Diversity is a key ingredient for better decision-making among teams. While homogenous groups may be susceptible to groupthink,1919 diverse teams can leverage a greater variety of perspectives and are likely to consider information more thoroughly and accurately.

  • Teams that include different viewpoints or thinking styles (cognitive diversity) solve problems faster.20
  • In a study on the decision-making behaviors of board directors, “deep-level diversity” (i.e., differences in background, personality, and values) contributed to a higher degree of creativity.21

Without diverse leaders, women (20%), people of color (24%), and LGBT employees (21%) are less likely to have their ideas endorsed.22

Inclusion Is Key to Team Performance23

The addition of women to all-male sales teams contributes to improved team performance. However, teams are more likely to reap the benefits of diversity on team performance when inclusion is part of the organizational culture.24

The more psychologically safe employees feel at work, the more likely they are to feel included in their work groups.25

  • Employees who feel included report higher levels of innovation and team citizenship.26

REPUTATION AND RESPONSIBILITY

Gender-Diverse Companies Have Excellent Reputations27

A majority (78%) of American adults consider gender diversity in the workplace important.28

Organizations ranked highly on Fortune’s World’s Most Admired Companies list have twice as many women in senior management than do companies with lower rankings.29

Mixed-Gender Boards Have Fewer Instances of Fraud30

Diverse teams are more likely to recognize risk factors. One study found that racially diverse teams of financial traders were more likely to avoid price bubbles.31

  • Gender-diverse corporate boards are associated with more effective risk-management practices when investing in research and development (R&D).32

When corporate boards include women, they provide greater attention to legally mandated responsibilities like monitoring and strategy involvement.33

  • Companies with gender-diverse boards have fewer instances of controversial business practices such as fraud, corruption, bribery, and shareholder battles.34
  • Gender-diverse boards are also associated with better collection and transparent disclosure of stock price information,35 as well as fewer financial reporting mistakes.36
Boardroom Diversity Strengthens Corporate Social Responsibility (CSR) Performance37

When corporate boards include members with diverse backgrounds and experiences, they are better able to recognize the needs and interests of different stakeholder groups.38

Gender-diverse boards are more likely to receive high ratings in CSR activities.39

  • A Catalyst and Harvard Business School study of Fortune 500 boardrooms found that companies with gender-inclusive teams contributed more charitable funds, on average, than companies without gender-inclusive teams.40

FINANCIAL PERFORMANCE

Diversity Is Associated With Improved Financial Performance41

Many studies link diversity to indicators of profitability and financial health, including:42

  • Accounting returns
  • Cash flow return on investment
  • Earnings Per Share
  • Earnings Before Interests and Taxes (EBIT) margins
  • Gross and net margins
  • Investment performance
  • Market performance
  • Market value
  • Return on Assets (ROA)
  • Return on Equity (ROE)
  • Return on Sales (ROS)
  • Revenue
  • Sales growth
  • Share price performance
  • Tobin’s Q

McKinsey & Company’s study of 1,000 companies in 12 countries found that organizations in the top 25% when it comes to gender diversity among executive leadership teams were more likely to outperform on profitability (21%) and value creation (27%).43

  • Organizations in the top 25% for ethnic/cultural diversity were more likely to achieve above-average profitability—33% for diverse executive teams and 43% for diverse boards.44
  • Companies pay a penalty for a lack of diversity. Companies in the bottom 25% for both gender and ethnic/cultural diversity were 29% less likely to experience profitability above the industry average.45
A Note About the Business Case and Financial Performance

Although Catalyst has produced research and tools about making the case, more recently, Catalyst and others have encouraged companies to “get beyond the business case for diversity.” The business case grew out of a need to explain the business benefits (especially financial benefits) of diversity to stakeholders. However, the connection between financial rewards and diversity is impossible to prove because research can only establish correlation, not causation, between the two. Further, even though the business case for diversity has been documented by Catalyst, McKinsey, Credit Suisse, and others for over 15 years, it never seems to be enough. Some people still ask for more proof that gender diversity is “good for business,” yet it never occurs to them to ask for the business case demonstrating that the status quo or all-male leadership teams and boards are good for business.

Instead of trying to seek that elusive “proof” that diversity causes improved business performance, companies should focus on diversity as a talent issue, and recognize that to be an industry leader, it is critical to tap into the full talent pool. By hiring a limited group of people, companies are missing out on significant segments of talent, so they should be putting energy and resources toward recruiting and retaining diverse employees and creating inclusive workplace cultures where everyone has an equal opportunity to contribute and succeed.

For more information about financial performance research, see: Catalyst, Why Diversity and Inclusion Matter: Financial Performance (August 1, 2018).

ADDITIONAL RESOURCES

Next Steps

Catalyst, Ask Catalyst Express: Starting Diversity Initiative.

Catalyst, Vital Signs.

Research

Rohini Anand, “Gender-Balanced Teams Linked to Better Business Performance: A Sodexo Study,” 2016 Workplace Trends Report (Sodexo, 2016).

Catalyst, Why Diversity Matters (July 23, 2013).

Catalyst, The Ripple Effect: Educating Women Changes Lives (August 25, 2017).

Catalyst, The Ripple Effect: Working Women Grow Economies (August 25, 2017).

Catalyst, Webinar Recording: First Steps—The Business Case for Diversity: Is This a Silver Bullet? (2018).

Katherine W. Phillips, “How Diversity Makes Us Smarter,” Scientific American, October 1, 2014.

Jonathan Woetzel, Anu Madgavkar, Kweilin Ellingrud, Eric Labaye, Sandrine Devillard, Eric Kutcher, James Manyika, Richard Dobbs, and Mekala Krishnan, The Power of Parity: How Advancing Women’s Equality Can Add $12 Trillion to Global Growth (McKinsey & Company, 2015).

 

How to cite this product: Catalyst, Quick Take: Why Diversity and Inclusion Matter (August 1, 2018).

 

 

  1. Catalyst does not have a single definition of diversity. Because it is different for each organization and region, we encourage organizations to create and own their unique definition of diversity. Diversity might encompass the visible (e.g., gender, race/ethnicity) or the invisible qualities (e.g., personality, family background, education, personal style) that make individuals unique. When defining diversity, it’s helpful for organizations to assume that diversity is the heterogeneity among all of us and therefore applies to everyone. It’s much more inclusive than calling out any one segment of the population as “diverse,” which has the effect of marginalizing others from both the conversation and the solution.
  2. Practitioners and researchers define inclusion in many different ways. Some definitions focus on valuing differences. Others emphasize finding common ground to promote cohesion. Psychological theory, as well as Catalyst’s research, gives credence to both these points of view. Our research reveals two basic ingredients of inclusion: uniqueness and belonging. When employees feel unique—recognized for their differences—and feel a sense of belonging based on sharing common attributes and goals with their peers, organizations best increase the odds of benefiting from workforce diversity. Jeanine Prime and Elizabeth R. Salib, Inclusive Leadership: The View From Six Countries (Catalyst, 2014): p. 6.
  3. Muhammad Ali, Isabel Metz, and Carol T. Kulik, “Retaining a Diverse Workforce: The Impact of Gender-Focused Human Resource Management,” Human Resource Management Journal, vol. 25, no. 4 (2015): p. 580-599.
  4. Muhammad Ali, Isabel Metz, and Carol T. Kulik, “Retaining a Diverse Workforce: The Impact of Gender-Focused Human Resource Management,” Human Resource Management Journal, vol. 25, no. 4 (2015): p. 580-599.
  5. E. Holly Buttner and Kevin B. Lowe, “Addressing Internal Stakeholders’ Concerns: The Interactive Effect of Perceived Pay Equity and Diversity Climate on Turnover Intentions,” Journal of Business Ethics, vol. 143, no. 3 (2017): p. 621-633.
  6. Meghna Sabharwal, “Is Diversity Management Sufficient? Organizational Inclusion to Further Performance,” Public Personnel Management, vol. 43, no. 2 (2014): p. 1-21.
  7. Joep Hofhuis, Pernill G. A. van der Rijt, and Martijn Vlug, “Diversity Climate Enhances Work Outcomes Through Trust and Openness in Workgroup Communication,” SpringerPlus, vol. 5 (2016).
  8. Anat Drach-Zahavy and Revital Trogan, “Opposites Attract or Attack? The Moderating Role of Diversity Climate in the Team Diversity-Interpersonal Aggression Relationship,” Journal of Occupational Health Psychology, vol. 18, no. 4 (2013): p. 449-457.
  9. Stephan A. Boehm, David J.G. Dwertmann, Florian Kunze, Björn Michaelis, Kizzy M. Parks, and Daniel P. McDonald, “Expanding Insights on the Diversity Climate-Performance Link: The Role of Workgroup Discrimination and Group Size,” Human Resource Management, vol. 53, no. 3 (2014): p. 379-402.
  10. Society for Human Resource Management, Employee Job Satisfaction and Engagement: The Doors of Opportunity Are Open: Executive Summary (2017): p. 2.
  11. Dana Kabat-Farr and Lilia M. Cortina, “Sex-Based Harassment in Employment: New Insights into Gender and Context,” Law and Human Behavior, vol. 38, no. 1 (2014): p. 58-72; Lindsey Joyce Chamberlain, Martha Crowley, Daniel Tope, and Randy Hodson, “Sexual Harassment in Organizational Context,” Work and Occupations, vol. 35, no. 3 (2008): p. 262-295.
  12. Stephanie N. Downey, Lisa van der Werff, Kecia M. Thomas, and Victoria C. Plaut, “The Role of Diversity Practices and Inclusion in Promoting Trust and Employee Engagement,” Journal of Applied Social Psychology, vol. 45, no. 1 (2015): p. 35-44.
  13. Rocío Lorenzo, Nicole Voigt, Karin Schetelig, Annika Zawadzki, Isabell M. Welpe, and Prisca Brosi, The Mix That Matters: Innovation Through Diversity (The Boston Consulting Group, 2017).
  14. Sylvia Ann Hewlett, Melinda Marshall, Laura Sherbin, and Tara Gonsalves, Innovation, Diversity, and Market Growth (Center for Talent Innovation, 2013).
  15. Derek R. Avery, Patrick F. McKay, Scott Tonidandel, Sabrina D. Volpone, and Mark A. Morris, “Is There a Method to the Madness? Examining How Racioethnic Matching Influences Retail Store Productivity,” Personnel Psychology, vol. 65, no. 1 (2012): p. 167-199.
  16. Rocío Lorenzo, Nicole Voigt, Karin Schetelig, Annika Zawadzki, Isabell M. Welpe, and Prisca Brosi, The Mix That Matters: Innovation Through Diversity (The Boston Consulting Group, 2017).
  17. Rocío Lorenzo, Nicole Voigt, Karin Schetelig, Annika Zawadzki, Isabell M. Welpe, and Prisca Brosi, The Mix That Matters: Innovation Through Diversity (The Boston Consulting Group, 2017).
  18. Adam D. Galinsky, Andrew R. Todd, Astrid C. Homan, Katherine W. Phillips, Evan P. Apfelbaum, Stacey J. Sasaki, Jennifer A. Richeson, Jennifer B. Olayon, and William W. Maddux, “Maximizing the Gains and Minimizing the Pains of Diversity: A Policy Perspective,” Perspectives on Psychological Science, vol. 10, no. 6 (2015): p. 742-748.
  19. The American Psychological Association defines groupthink as “a strong concurrence-seeking tendency that interferes with effective group decision making. Symptoms include apparent unanimity, illusions of invulnerability and moral correctness, biased perceptions of the outgroup, interpersonal pressure, self-censorship, and defective decision-making strategies. Causes are thought to include group cohesion and isolation, poor leadership, and the stress involved in making decisions.” American Psychological Association, “Groupthink,” APA Dictionary of Psychology (2018).
  20. Alison Reynolds and David Lewis, “Teams Solve Problems Faster When They’re More Cognitively Diverse,” Harvard Business Review (March 30, 2017).
  21. Mariateresa Torchia, Andrea Calabrò, and Michèle Morner, “Board of Directors’ Diversity, Creativity, and Cognitive Conflict: The Role of Board Members’ Interaction,” International Studies of Management & Organization, vol. 45, no. 1 (2015): p. 6-24.
  22. Sylvia Ann Hewlett, Melinda Marshall, and Laura Sherbin, “How Diversity Can Drive Innovation,” Harvard Business Review (December 2013).
  23. Ream A. Shoreibah, Greg W. Marshall, and Jule B. Gassenheimer, “Toward a Framework for Mixed-Gender Selling Teams and the Impact of Increased Female Presence on Team Performance: Thought Development and Propositions,” Industrial Marketing Management, vol. 77 (February 2019).
  24. Ream A. Shoreibah, Greg W. Marshall, and Jule B. Gassenheimer, “Toward a Framework for Mixed-Gender Selling Teams and the Impact of Increased Female Presence on Team Performance: Thought Development and Propositions,” Industrial Marketing Management, vol. 77 (February 2019).
  25. Sharing innovative solutions at work often comes with the risk of being discredited or damaging reputations. Psychological safety is the ability of team members to feel safe when taking these risks—the team “has their backs.” Psychologically safe team members are more willing to speak up, make mistakes, and trust their colleagues to not undermine their work. Jeanine Prime and Elizabeth R. Salib, The Secret to Inclusion in Australian Workplaces: Psychological Safety (Catalyst, 2015).
  26. Jeanine Prime and Elizabeth R. Salib, Inclusive Leadership: The View From Six Countries (Catalyst, 2014).
  27. Weber Shandwick, GFP Index 2016 (2016).
  28. Cary Funk and Kim Parker, “Women in STEM See More Gender Disparities at Work, Especially Those in Computer Jobs, Majority-Male Workplaces,” Women and Men in STEM Often at Odds Over Workplace Equity (Pew Research Center, January 9, 2018).
  29. Weber Shandwick, GFP Index 2016 (2016).
  30. Linda-Eling Lee, Ric Marshall, Damion Rallis, and Matt Moscardi, Women on Boards: Global Trends in Gender Diversity on Corporate Boards (MSCI, 2015).
  31. Sheen S. Levine, Evan P. Apfelbaum, Mark Bernard, Valerie L. Bartelt, Edward J. Zajac and David Stark, “Ethnic Diversity Deflates Price Bubbles,” Proceedings of the National Academy of Sciences of the United States of America, vol. 111, no. 52 (2014).
  32. Shimin Chen, Xu Ni, and Jamie Y. Tong, “Gender Diversity in the Boardroom and Risk Management: A Case of R&D Investment,” Journal of Business Ethics, vol. 136, no. 3 (2016): p. 599–621.
  33. Corinne Post and Kris Byron, “Women on Boards and Firm Financial Performance: A Meta-Analysis,” Academy of Management Journal, vol. 58, no. 5 (2015): p. 1546–1571.
  34. Linda-Eling Lee, Ric Marshall, Damion Rallis, and Matt Moscardi, Women on Boards: Global Trends in Gender Diversity on Corporate Boards (MSCI, 2015).
  35. Ferdinand A. Gul, Bin Srinidhi, and Anthony C. Ng, “Does Board Gender Diversity Improve the Informativeness of Stock Prices?” Journal of Accounting and Economics, vol. 51, no. 3 (2011): p. 314–338.
  36. Aida Sijamic Wahid, “The Effects and the Mechanisms of Board Gender Diversity: Evidence From Financial Manipulation,” Journal of Business Ethics (2018)
  37. Maretno Harjoto, Indrarini Laksmana, and Robert Lee, “Board Diversity and Corporate Social Responsibility,” Journal of Business Ethics, vol. 132, no. 4 (2015): p. 641–660.
  38. Maretno Harjoto, Indrarini Laksmana, and Robert Lee, “Board Diversity and Corporate Social Responsibility,” Journal of Business Ethics, vol. 132, no. 4 (2015): p. 641–660.
  39. Rachel Soares, Heather Foust-Cummings, Claude Francoeur, and Réal Labelle, Companies Behaving Responsibly: Gender Diversity on Boards (Catalyst, 2015).
  40. Rachel Soares, Christopher Marquis, and Matthew Lee, Gender and Corporate Social Responsibility: It’s a Matter of Sustainability (Catalyst, 2011).
  41. Vanessa Fuhrmans, “Companies With Diverse Executive Teams Posted Bigger Profit Margins, Study Shows,” The Wall Street Journal, January 18, 2018.
  42. For a full overview of research on diversity and financial performance, see: Catalyst, Why Diversity and Inclusion Matter: Financial Performance (August 1, 2018).
  43. The authors measured profitability by average EBIT margin and value creation by economic profit (EP) margin. Vivian Hunt, Sara Prince, Sundiatu Dixon-Fryle, and Lareina Yee, Delivering Through Diversity (McKinsey & Company, 2018).
  44. The authors measured profitability by average EBIT margin. Vivian Hunt, Sara Prince, Sundiatu Dixon-Fryle, and Lareina Yee, Delivering Through Diversity (McKinsey & Company, 2018).
  45. The authors measured profitability by average EBIT margin. Vivian Hunt, Sara Prince, Sundiatu Dixon-Fryle, and Lareina Yee, Delivering Through Diversity (McKinsey & Company, 2018).